Does the 50% Rule Apply for New Construction?

3 Replies

BP Team,

We are doing the underwriting on a development project where we hope to build 2 new 8 unit buildings with Class A apartment housing.

My question is what has your experience is with the "50% Rule" when it comes to new construction? What would a good estimate be for the annual pro forma for expenses? Obviously my expectation for CapEx costs are lower but curious if some of the more experienced developers on the site have developed their own expense guideline for new apartment construction.

Thanks!

Kris

I would be careful with the 50% rule, like the 70% rule for making offers, it's a rule of thumb (but even more so). On new construction it should be less. And if it's in a war zone or managed with a bad property management company it will be much more than 50%.

Andrew,

Understood thank you. I guess I am looking for some developers who have built new apt buildings in the past and have some data to look at. I know in my small aprtment portfolio my expenses account for 60% of gross rents as opposed to the 50% rule...

Just wanted to see if anyone had some experience to draw off of....

Kris, your higher percentage probably a factor of excessive taxes in NY. Certainly noticed that when viewing some low cost NY properties.